In a significant move, the U.S. Department of Education has sent alarming emails to millions of borrowers with defaulted federal student loans. These messages serve as a warning that the government is gearing up to seize a portion of their earnings. This development follows a formal announcement made last month, indicating a swift escalation in collections efforts against those who have fallen behind on their loan payments. The email explicitly states, “Collections on defaulted federal student loans are resuming,” highlighting the serious consequences that may arise, such as the potential withholding of tax refunds and other federal benefits.
Currently, over five million borrowers are in default on their federal student loans, and this number is expected to double by the end of the year as additional borrowers struggle with their monthly payments. The Department of Education has reported that “4 million borrowers are in late-stage delinquency,” projecting that nearly 10 million borrowers could be in default soon, which would account for almost 25% of the federal student loan portfolio.
The Department of Education's first course of action will be to refer defaulted borrowers to the Treasury Offset program. This initiative, managed by the U.S. Department of Treasury, enables the government to intercept and offset income and federal benefits owed to defaulted borrowers. U.S. Secretary of Education Linda McMahon emphasized that the department aims to “shepherd the student loan program responsibly and according to the law.” Under the Treasury Offset program, the government can seize:
100% of federal tax refunds Up to 25% of federal employee retirement benefits Up to 15% of federal wages, Social Security benefits, and Railroad Retirement benefitsFollowing the initiation of Treasury Offset referrals, the Department of Education plans to escalate collections through administrative wage garnishment later this summer. This process allows the federal government to instruct employers to withhold up to 15% of a borrower’s wages to apply towards their defaulted federal student loans. The department has indicated that all 5.3 million borrowers in default will receive a notice from the Treasury regarding this impending wage garnishment.
It’s important to note that unlike private lenders, the federal government does not need a court order to garnish wages from defaulted borrowers. The Department of Education can execute this action administratively, streamlining the process and bypassing court procedures.
Despite the government's ability to move forward without court intervention, borrowers still retain certain rights under the U.S. Constitution. They must receive adequate notice before any Treasury Offset or wage garnishment actions are taken. The Department of Education has stated that all collection activities are conducted only after borrowers have been informed and given an opportunity to repay their loans.
The recent mass emails sent to defaulted borrowers are not considered formal notice. They represent initial outreach to alert borrowers of the upcoming collection efforts. Typically, formal notifications regarding Treasury Offset or wage garnishment are dispatched via mail to the borrower's last known address, providing them with a set period to respond. Borrowers are responsible for keeping their contact information updated to avoid missing crucial communications.
Borrowers facing imminent wage garnishment or benefits offset have several options available. Those who believe their loan status is erroneous can dispute it or request an administrative hearing if they experience severe financial hardship. Additionally, borrowers may qualify for an administrative discharge if they have a total and permanent disability.
There are pathways for defaulted federal student loan borrowers to regain good standing, such as through loan rehabilitation or Direct loan consolidation. These options can help borrowers access affordable payments via income-driven repayment plans and ultimately lead to potential student loan forgiveness. The Department of Education advises that contacting the Default Resolution Group is essential to determine eligibility for these programs.
For borrowers who are currently behind on student loan payments but have not yet defaulted, there is still time to take action. Federal student loans will only go into default after being 270 days past due. Those who are close to this threshold can bring their accounts current by paying the past due balance, requesting a deferment or forbearance, or applying for income-driven repayment plans. It is advisable for borrowers to reach out to their loan servicer for detailed information and assistance.
